Avalon Rare Metals up on updated resource estimate

Shares of Avalon Rare Metals (AVL-T, AVARF-O) shot up 11.2% or 23¢ apiece to close at $2.28 on news that an updated resource estimate for the Nechalacho deposit at Thor Lake in Canada’s Northwest Territories now makes it the second-largest rare earth element deposit in the world by reported total rare earth elements (TREO) and the third-largest niobium deposit.

The updated resource estimate does not even include drill results from the winter 2010 program and is based on the same assays of 155 drill holes through the end of 2009 in addition to the re-assay of core from six historical drill holes that were used in the previous estimate of Jan. 14.

The difference is that in the updated resource estimate, the revenue side of the equation used to define the cut-off grade went up because of different metal price assumptions. In addition, the resource grew because of the inclusion of other rare metals that weren’t used in the previous resource estimate. The previous resource did not include potential byproduct revenue streams from other rare metals that are recoverable from the deposit such as zirconium, niobium and tantalum.

The revised estimate came about as part of a prefeasibility study that is underway and scheduled for release within the next two weeks.

Inferred resources for both the Basal and Upper zones now total 175.93 million tonnes averaging 1.43% TREO, or 2.5 million tonnes of contained TREO. This is a 100% increase in contained TREO from the earlier Jan 14 resource estimate.

In terms of indicated resources, the new estimate demonstrates that the Basal zone has 14 million tonnes (an increase of 5.5 million tonnes from the previous estimate) averaging 1.8% TREO and the Upper zone contains 6.9 million tonnes averaging 1.45% TREO.

“It’s not a resource that is likely to run out of reserves after the mine gets established,” Don Bubar, Avalon’s president and chief executive, told The Northern Miner in an interview, adding that the TREO grade is also relatively high at Nechalcho compared with other similar resources that have a favorable balance of heavy and light rare earth elements.

“You need both,” he explains. “You need TREO grade and the balance tilted towards the heavies to create value and to have everything working for you as a development opportunity.”

The Nechalacho deposit is made up of an upper light rare earth element-enriched domain referred to as the Upper zone, and a lower heavy rare-earth element enriched domain referred to as the Basal zone.

Total rare earth oxides refer to the elements: lanthanum to lutetium, plus yttrium, expressed as oxides. Heavy rare earth oxides (HREO) refer to the elements europium to lutetium, plus yttrium, expressed as oxides as a percentage of TREO. Light rare earths (LREO) refer to the elements lanthanum to samarium, expressed as oxides.

Bubar notes that while the prefeasibility study will be released shortly, the company will also be releasing assay results over the next few months from its 2010 winter drill program of 11,398 metres in 43 holes. Initial assay results from that drill program were first released on May 12.

As far as the market for rare earth metals is concerned, Bubar estimates that there will be strong demand for the heavier rare earth metals by the time Avalon is ready to start production at Nechalacho in 2014 or 2015.

“If anything we think some of the forecasts for future demand may be understated and there are plenty of indications that suggest the supply side will be severely constrained given increased internal demand in China and industry consolidation there,” he says. “While the rare earth supply side is adequate right now, the market is seeing a really significant shortage emerging especially in terms of the HREOs in the next three to five years. There’s no doubt in our minds that there’s going to be a real need for new producers by the time we’re ready to enter the marketplace.”

The largest consumers of the HREOs likely will be companies that make magnet alloys for the automotive industry and other motor technologies, as well manufacturers in the lighting industry, where new energy efficient lighting will require more HREOs.

Bubar notes that over the next few years market development will be one of Avalon’s top priorities. “We’ll have to have some off-take agreements in place with end-users or we wouldn’t be in a position to access development capital,” he says. “Obviously that’s a big component of our work to develop customer relationships.”